Biden’s Semiconductor Plan Bets on Federal Aid to Change Corporate Behavior
The administration claims that the new $40 billion in subsidies it placed on conditions will allow U.S.-based semiconductor manufacturers to compete globally. Some economists disagree.
WASHINGTON -- The plan by President Biden to invest billions in semiconductor manufacturing is a major shift in American economic policy. It aims to counter China by creating a single critical industry. But Biden goes even further. Biden is using the money for a change in how corporations behave.
To get a piece the almost $40 billion in aid Mr. Biden's administration started to hand out Tuesday, semiconductor manufacturers will have to provide child care, run their plants using low-emission energy sources, pay union wages for workers, avoid stock buybacks, and possibly share some profits with the government.
This decision is a wager on the ability of the federal government transform private industry. It is also a departure from the traditional US engagement with corporate America. In essence, the president is trying to combine disparate policy goals into a large spending bill. This was meant to support a supply of critical semiconductors for national security and the economy.
This approach could amplify the impact of the CHIPS Act, and other economic bills that Mr. Biden has passed over the last two years. It also achieves multiple goals simultaneously. According to administration officials, the guidelines and money will help American industry move toward Mr. Biden’s vision of an American economy that produces more U.S. goods and creates better working conditions for workers.
However, this strategy could pose significant risks when it comes to testing the limits of a new policy in industrial affairs. Many economists, including those who support strong federal spending to boost strategic industries, believe Mr. Biden is at risk of losing his core economic goals.
Adam Ozimek is the chief economist of the Economic Innovation Group in Washington. He said that everyone recognizes the difficulty in making the U.S. semiconductor market more competitive and larger. We're trying to do a dozen different things simultaneously, making it more difficult.
Mr. Ozimek stated that industrial policy experts should be concerned about the possibility of it failing and that it could discredit industrial policies for the next generation.
Biden officials claim that they don't ask companies to do anything that isn't in their commercial interests. They also say that the actions they take aren't meant to be punishive. They feel empowered by the amount they are asking for and they believe that the companies will accept the terms they have attached. These officials basically say that they aren't burdening companies with too much money. They are helping them to attract workers and save federal dollars.
Gina Raimondo, Commerce Secretary, repeatedly referred to in a recent interview that the lack of child care access is an economic problem and a major contributor to the labor shortages American manufacturers complain about. She stated that corporations and the government have been hindered from dealing with this issue because of their bias against women.
Ms. Raimondo stated, "I am sort of requiring them pay attention because I know this what they need to succeed."
Ms. Raimondo described the financial rules that companies must follow when they take federal funds as a way of ensuring taxpayer dollars aren't wasted. Companies will be required to share any unexpected upside profits with government to encourage them to be honest and accurate with their financial projections so that dollars can go where they are most needed. Administration officials claim that the restrictions on stock buybacks will stop taxpayer dollars being used to benefit shareholders and chief executives.
After reviewing the rules, some economists and industry lobbyists expressed concern that companies might be forced to divert money from the central goals of the new law. Many complained that the administration officials failed to link the CHIPS funding announcements and efforts to shrink, rather than expand, environmental regulations, and other government rules governing construction projects.
Neil Bradley, executive vice president of the U.S. Chamber of Commerce in Washington, stated that "we should be focused on eliminating regulatory barriers, particularly in the permitting area -- and we must be careful about adding new requirements that only increase the cost and delay bringing up production online."
Some congressional Republicans also accused the administration, based on its attempts to force subsidy companies into liberal priorities, of undermining their intent.
Chairman of the Science, Space and Technology Committee, Frank D. Lucas, a Representative from Oklahoma, stated that the Administration was "adamant” that the United States encourage chip production or companies would choose to construct in countries with more attractive policies.
"That's why, it's troubling that the administration now has the $52 Billion in funds they requested," Mr. Lucas stated. "They're focusing less upon the urgent need to produce chips and more on trying to impose their labor agenda onto this critical industry."
Some foreign chip manufacturers are already concerned about the high cost of investing in the United States and the managerial challenges that this can create. Other countries continue to support their chip facilities aggressively, making it an attractive alternative to the United States.
Economists agree that the size and practices of Mr. Biden’s industrial policy show how profoundly Washington has changed its view of the government's place in the economy.
The key reason for this shift is what has been happening in East Asia, especially China. There, governments frequently use state subsidies to boost industries and grab global market share. The integrated circuit was invented by American scientists in 1950. Since then, Taiwan, South Korea and Israel have heavily invested in chips. This has helped to drive production outside the United States.
Only 12 percent of global chip manufacturing is now done by the United States. Despite being the most innovative chip manufacturers in the world, many American companies continue to design and manufacture cutting-edge chips.
The country's dependence on foreign factories was highlighted by the shortage of critical products and chips during the pandemic. The U.S. dependence upon China for key products such as electric vehicles, steel, and rare earth metals has led to a shift in Washington's economic policies and less concern about government intervention in markets.
Both parties now support the use of industrial policies to combat China's economic dominance. Members of Trump and Biden's administrations as well as Democratic and Republican legislators helped to create the CHIPS and Science Act which Congress passed by large margins last summer.
The bill contained strict provisions that were not permissible for companies receiving subsidies. These included a ban on government funding for stock buybacks or dividends, and a 10-year limit on investments in cutting-edge Chinese chip facilities. Companies were encouraged to provide work force training programs and join forces with unions and educational institutions.
Biden's administration seems confident that the $52 million carrot it offers to chip manufacturers, suppliers, and research facilities is enough to incentivize companies to ignore any corporate complaints about its efforts to influence their behavior. Officials point out that some chip manufacturers already meet some requirements in other places. For example, Taiwan Semiconductor Manufacturing Company is building an Arizona facility and provides child care at its several Taiwan plants. In order to support national security or government initiatives, chip makers in China, for example, might have to go to great lengths.
Although some chief executives privately complained about the restrictions, most still praise the program publicly. Major semiconductor companies have already begun construction on new, expensive U.S. facilities. Nearly $200 billion has been pledged by companies since early 2020 to support U.S.-based chip manufacturing projects. Many of these commitments were made in anticipation of funding.
Intel was one of the companies that said Tuesday in a press release that the Commerce Department's CHIPS guidelines were an "important step for American semiconductor firms to be globally competitive" and would help restore balance in the global chip manufacturing industry. The Semiconductor Industry Association stated it was reviewing the rules, but it welcomed the Commerce Department taking the initiative to put the program into motion.
Clyde V. Prestowitz Jr. is a former trade official, labor economist, and advocate for industrial policy. He said that he sympathizes with the Biden administration’s goal of maximising the program's benefits to the public, not just to shareholders.
He stated that the policy was designed to ensure security and increase the well-being for all Americans. It is not intended to be a gift for the semiconductor companies.